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Rating Action:

Moody's upgrades Southern California Edison Company

16 Oct 2006
Moody's upgrades Southern California Edison Company

Approximately $7 Billion of Debt Securities and Bank Credit Facilities Affected

New York, October 16, 2006 -- Moody's Investors Service upgraded the long-term ratings of Southern California Edison Company by one notch (SCE: senior unsecured debt to A3 from Baa1), affirmed SCE's short-term rating for commercial paper at Prime-2, and assigned an Issuer Rating of Baa2 to parent company, Edison International (EIX). Moody's also affirmed the rating of Edison Funding Company (EFC), an EIX subsidiary, at Ba1. The rating outlook for SCE, EIX and EFC is stable.

"While numerous challenges remain for electric utilities operating in California, the SCE upgrade reflects demonstrated evidence of the sustainability of strong credit quality measures due, in part, to more predictable regulatory actions by the CPUC", said A.J. Sabatelle, Moody's Vice President.

The rating upgrade at SCE reflects an expectation of continued strong financial metrics due to favorable rate case decisions rendered by the California Public Utilities Commission (CPUC) within the recent past year all of which point to a more supportive and somewhat more reliable regulatory environment within the state. Of particular note is the outcome of SCE's general rate case decision in the second quarter 2006 which authorized base rate increases of about $274 million for 2006, $74 million in 2007 and $104 million in 2008. The upgrade recognizes the effectiveness of rate mechanisms established by legislation and implemented by the CPUC to mitigate changes in fuel and purchased power costs, and considers the recent CPUC decision to grant SCE a waiver from filing a test year 2007 cost of capital application thereby maintaining the existing 11.6% authorized ROE through the end of 2007.

SCE's ratio of funds from operations to total debt is expected to be well above 25% over the next several years while at the same time funds from operations coverage of interest expense continue to exceed 5 times. These financial measures, which incorporate Moody's standard adjustments, are consistent with a low A rated utility that operates in a more challenging regulatory environment and are in accordance with the guidelines in Moody's rating methodology for electric utilities in the higher end of the medium global risk category.

EIX's Baa2 Issuer Rating considers the reduction in consolidated leverage that has continued since 2003, the stable financial performance expected at SCE, the continued reliance on SCE as a principal source of cash flow and earnings for the next few years and the favorable prospects for Edison Mission Energy (EME: Ba3 Corporate Family Rating), its independent power subsidiary. EIX's ratio of total adjusted consolidated debt to total adjusted capitalization which has declined from 71% in 2003 to 65% at June 30, 2006, is expected to decline to 60% by 2008 when an $800 million Mission Energy Holding Company obligation is repaid at maturity from accumulated cash on hand. Additionally, through its ownership of well-positioned, low-cost coal-fired electric generation assets in the Midwest and PJM, EME intends to manage its generation and trading activities to produce more predictable earnings and cash flow over the next few years due in large part to the company's forward hedging strategies implemented for its electric output. Given EIX's reliance on the more volatile wholesale power business and its exposure to the more challenging, but improving, regulatory environment in California, Moody's considers EIX's overall business position to be at the higher end of the medium global risk category.

Moody's expects EIX's ratio of consolidated funds from operations to total debt to be around 20% over the next several years, and its consolidated funds from operations coverage of interest expense to approach 4x during that period. These financial measures, which incorporate Moody's standard adjustments, are consistent with a mid Baa rated utility holding company in accordance with the guidelines in Moody's rating methodology for electric utilities at the higher end of the medium global risk category.

The rating affirmation for EFC (Ba1 senior unsecured) and stable rating outlook reflects the company's reliance on cash received through the operation of Tax Allocation Agreements among EFC, its ultimate parent, EIX, and other EIX subsidiaries. The rating considers the ongoing Internal Revenue Service audit concerning three large leverage lease transactions entered into by EFC in the mid-1990's, and the expectation that resolution of this issue will likely take several years. The rating further incorporates the fact that EFC's day-to day business is being run by EME management and considers EIX's plan to harvest EFC's existing portfolio and not make new investment through EFC.

The stable rating outlook for SCE reflects expected continuation of strong predictable cash flows derived from the company's large and diverse service territory, and that SCE will be able to manage its growth while maintaining a conservative capital structure, particularly given the size of the capital budget for both generation and delivery related assets. The stable outlook further reflects an expectation that the current trend of constructive regulatory and legislative support from the CPUC and the California legislature will continue, as key constituents work to strengthen the durability and predictability of the California electric marketplace.

In light of the company's very sizeable capital expenditure program as well as the region's need to add generating resources, some of which will likely be built by SCE, limited prospects exist for the rating to be upgraded over the next several years. The rating of SCE could be downgraded if the company elects to finance its growing capital expenditures more aggressively with higher leverage, if certain California Department of Water Resources contracts are assigned to SCE without supportive action from the CPUC, or if there is a reversal of the current trend of increasing regulatory consistency.

The stable outlook for EIX considers the stability of its principal subsidiary, SCE, a conservatively financed capital expenditure program, and the continuation of reliable cash flow and earnings contribution from EME. In light of the size of SCE's anticipated capital expenditure program and expected growing contribution from EME, a weaker subsidiary, limited prospects exist for the rating to be upgraded over the next several years. EIX's rating could be downgraded if the company were to pursue a more aggressive capital management program or if the credit quality of its principal subsidiary, SCE, were to substantially weaken.

Separately, Moody's has withdrawn the ratings for the multiple shelf registration at EIX, whose ratings range from (P) Baa3 to (P) Ba1 and shelf registrations for preferred stock at EIX and at EIX Trust III, both rated (P) Ba1, as the capability to issue under these shelf registrations has expired.

Ratings Upgraded:

- SCE's first mortgage bonds, secured pollution control bonds, and secured bank credit facility to A2 from A3;

- SCE's senior unsecured debt, senior unsecured pollution control bonds, and Issuer Rating to A3 from Baa1;

- SCE's preference and preferred stock to Baa2 from Baa3;

- Multiple senior shelf registration at SCE to a range of (P)Baa2 to (P)A2 from a range of (P)Baa3 to (P)A3;

- Shelf registration for the issuance of preference and preferred stock at SCE Trust I, SCE Trust II, and SCE Trust III to (P)Baa2 from (P)Baa3

Rating Assignment:

- EIX, Issuer Rating of Baa2

Headquartered in Rosemead, California, SCE is a vertically integrated utility and a wholly-owned subsidiary of EIX.

New York
William L. Hess
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
A.J. Sabatelle
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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